Delhi High Court
Hb Stockholdings Ltd. vs Dcm Shriram Industries Ltd & ... on 25 August, 2009
Author: S. Muralidhar
IN THE HIGH COURT OF DELHI AT NEW DELHI
CS(OS) 2011/2008 & IAs 11686, 11687, 12820,
12822, 12823/2008
Reserved on: July 17, 2009
Decision on : August 25, 2009
HB STOCKHOLDINGS LTD. ..... Plaintiff
Through Mr. Anant Haksar, Senior Advocate
with Mr. H.S. Chandhoke, Advocate
versus
DCM SHRIRAM INDUSTRIES LTD
& OTHERS ..... Defendants
Through Mr. T.K. Ganju, Senior Advocate
with Mr. Ramesh Singh, Mr. A.T. Patra,
Ms. A. Patra and Ms. Roopa
Dayal, Advocates for D-1 to 13.
Mr. I. Ghosh with
Mr. Sandeep Mahapatra, Advocate for D-14.
CORAM:
HON'BLE DR. JUSTICE S. MURALIDHAR
1.Whether reporters of the local newspapers
be allowed to see the judgment? No
2.To be referred to the Reporter or not ? Yes
3. Whether the judgment should be reported in the Yes
Digest?
JUDGMENT
25.08.2009
S. Muralidhar,J.
IA No. 12820/2008
1. This is an application under Order VII Rule 11 read with Section
151 of the Code of Civil Procedure 1908 („CPC‟) seeking rejection of
the plaint.
The case of the Plaintiff
2. The Plaintiff H.B. Stockholdings Limited („HBSL‟) claims to hold
24.8% of expanded issued and paid-up capital of DCM Shriram
Industries Limited („DSIL‟), Defendant No.1 and thereby being its
single largest shareholder. On 22nd September 2008, the Plaintiff
received the Annual Report and audited accounts of DSIL for the year
ending 31st March 2008, which had been approved by the Board of
Directors of DSIL on 25th June 2008. According to the Plaintiff, the
Annual Report and audited accounts revealed that they were "grossly
inaccurate and/or lacking in several material particulars" and "do not
reflect a true and fair view of the Company‟s affairs, apart from being
in violation of the provisions of the Companies Act, 1956 („Act‟), the
provisions of the Listing Agreement with the Bombay Stock
Exchange (BSE) and the Company‟s own Code of Business Conduct
and Ethics." It is claimed that these constituted "unjust and unlawful
acts of the Defendants" which were likely to "cause irreparable harm
and injury not only to the Plaintiff but also to over one lakh other
shareholders of the Defendant No.1 company."
3. Tracing the background to the present suit, it is stated in the plaint
that Versa Trading Limited („VTL‟) was a wholly owned subsidiary
of DSIL. In September 2002, DSIL sold 50.02% of its shareholding in
VTL at 10 paise per share against its acquisition price of Rs.10/- per
share to three entities viz., AKS International Limited (AIL), RPG
Securities Limited (RSL) and Indus Netlink Limited (INL). However,
a perusal of the Annual Reports of these three companies for the year
ending 31st March 2006 did not reflect any investment in VTL. It had,
therefore, to be inferred that the three companies were benami holders
of the said shares. The balance 49.98% shares held by DSIL in VTL
were claimed to have been sold in 2007-08 but the price at which they
were sold was not known. According to the Plaintiff, it was strange
that DSIL would sell its shareholding in VTL when it knew that more
than Rs.18 crores would be raised by VTL itself for investment in
DSIL. Moreover, VTL owed DSIL about Rs.7.8 crores as on 31st
March 2007. Out of this debt, a sum of Rs.7 crores was converted
into redeemable non-cumulative preference shares. However, the
Directors‟ Report dated 30th July 2007 of DSIL as well as of VTL did
not reflect any increase in the authorized capital of VTL. They also
made no mention of the issuance of any preference shares in lieu of
the debt owed by VTL to DSIL. It is stated that VTL could not have
possibly invested Rs.18.63 crores in DSIL instead of repaying the
debt. DSIL‟s balance sheet showed that DSIL had made a 100%
provision for the Rs.7 crores invested in VTL.
4. According to the Plaintiff, the Annual Return of VTL dated 30 th
August 2007 filed with the Registrar of Companies („ROC‟) did not
reflect the increase in the share capital or the issuance of preference
shares to DSIL. The shareholding pattern in terms of the Annual
Return showed that DSIL held 49.98% shares, and the three
companies AIL, RSL and INL 16.67%, 16.67% and 16.68% shares
respectively. The six individuals shown as the remaining shareholders
of VTL were either DSIL‟s or VTL‟s employees. As already
mentioned in the Annual Returns of the three companies i.e AIL, RSL
and INL for the years ending 31st March 2006 and 31st March 2007,
their investment in VTL was not shown. The Auditors‟ Report of
VTL for the year ending 31st March 2007 showed that VTL had
accumulated losses exceeding the company‟s share capital, and yet it
was investing Rs.18.63 crores in DSIL.
5. According to the Plaintiff, although DSIL itself had not indicated
how and to whom it had sold the remaining 49.98% shares held by it
in VTL, enquiries revealed that they were sold to DCM Hyundai
Limited („DHL‟). Also AIL, RSL and INL sold their 50.02% shares
in VTL to DHL.
6. On 16th October 2007, a resolution was passed by the Board of
Directors of DSIL by which 7 lakh share warrants were to be issued
to the Promoters/Promoter Group companies including VTL. 6.99
lakh warrants in the sum of Rs.18.63 crores were allotted to VTL.
This despite the fact that VTL had a negative net worth and was
prohibited by the Reserve Bank of India („RBI‟) by an order dated
24th November 2001 from transacting the business of a non-banking
financial institution. Also, VTL was not authorized by its
Memorandum and Articles of Association to make such investments.
The minutes of the meeting of the Board further show that rights issue
was never discussed in detail and Letters of Intent had been received
by the proposed allottees including VTL.
7. On 18th October 2007, a notice was sent to the shareholders of
DSIL under Section 192A of the Act stating that the purpose of the
preferential issue was to raise funds for working capital purposes and
supplementing bank finance. The notice did not state the number of
warrants to be allotted to each of the six proposed entities. The
amount proposed to be raised in terms of the notice was
approximately Rs.12 crores, spread over the next 18 months.
8. On 15th November 2007, VTL passed three resolutions at an
Extraordinary General Meeting (EGM): (a) to increase its authorized
capital to Rs.32 crores; (b) to issue and allot 2 crore equity shares of
Rs.10 each to DHL which was now suddenly referred to as its
Holding Company; and (c) to obtain the approval of shareholders
under Section 372 A (1) of the Act for the purpose of making an
investment of Rs.18.63 crores for subscribing to 6.9 lakh warrants at
Rs.90/- per share issued by DSIL. Thus, as on 16th October 2007 the
Letter of Intent by VTL to DSIL to subscribe to the proposed issue of
warrants was without authority and hence void. According to DSIL
itself, the price of the warrants was revised only on 21st November
2007 from Rs.57/- per share (set on 8th November 2007) to Rs.90/-
per share. It was therefore strange that VTL would have offered to
subscribe to warrants at Rs.90/- per share on 15th November 2007
when the DSIL‟s Board meeting determined this price only on 21st
November 2007.
9. In order to consolidate its shareholding, HBSL made a public
announcement on 19th November 2007 under Regulations 10 and 14
of the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997 (SEBI Takeover Code) for acquisition of 35 lakhs
equity shares of DSIL.
10. According to the Plaintiff, due to various acts of oppression and
mismanagement perpetrated by the promoters and directors of DSIL,
the HBSL was constrained to approach the Company Law Board
(„CLB‟) with a petition under Sections 397 and 398 of the Act. In the
said petition, which is pending adjudication, it was inter alia
mentioned by the Plaintiff that on 29th November 2007, it had written
a letter to DSIL urging it to go in for a rights issue and even offering
to have the same underwritten. The Plaintiff had further made an offer
of subscribing to the warrants proposed to be issued at a price of
Rs.120/- per share rather than the price of Rs.90/- per share that had
been proposed. However, the said letter was completely ignored and
warrants allotted to the six entities. It is stated that DSIL had raised
Rs.18.9 crores by the allotment of shares although it required only
Rs.12 crores. Further the actual receipt of moneys of Rs.18.9 crores
was not evidenced except for the certificate given by Defendant
No.14 A.G. Ferguson & Co. No information was given as to the
utilization of the moneys allegedly raised for the payment of cane
arrears. The Plaintiff also stated that it had come to know that DSIL
had raised Rs.87.752 crores from the Sugar Development Fund and a
consortium of Banks between April 2007 and April 2008 of which
Rs.45.752 crores was specifically earmarked for the purpose of
payment and sugarcane arrears. Therefore, the reason given for
raising funds through allotment of shares was apparently false. It is
submitted by the Plaintiff that reasons given by DSIL for raising
funds has kept changing from time to time. It is further pointed out
that although the shares were to be allotted in three tranches, DSIL
issued the entire shares by 1st April 2008. Further, 20.7 lakhs shares
were allotted to VTL.
11. On 26th March 2008, a resolution was passed by the Board of
Directors of VTL stating that it was now a wholly owned subsidiary
of DHL which had proposed to extend its financial year by six
months i.e. ending on 30th September 2008 and, therefore, it was now
extending its financial year likewise.
12. As regards DHL enquiries revealed that DSIL held 49.28%
shareholding in DHL plus 100% of optionally convertible preference
shares amounting to Rs.12.85 crores. Moreover, the Articles of
Association of DHL gave substantial control to DSIL over the
management and composition of its Board of Directors. The pattern
and composition of the Board of Directors of DHL revealed that the
DHL is in fact a subsidiary of DSIL. Further, DHL had pledged all
its movable and immovable properties to DSIL which had in turn
undertaken to repay all DHL‟s loans to banks and financial
institutions. However this had not been reflected in the accounts of
DSIL.
13. DHL has been a loss making company since 1995 and it had been
declared „sick‟ by the Board for Industrial and Financial
Reconstruction („BIFR‟) on 28th July 1998. It is currently under a
scheme of rehabilitation which had been sanctioned by the BIFR in
2007. According to the report of the Board of Directors of DHL,
DSIL had written-off loans of over Rs.75 crores of DHL. The
Plaintiff has sought to explain how DSIL first financed VTL and
DHL and then wrote off crores of dues from both these companies
thereby depleting the shareholder value of DSIL. Notwithstanding the
write offs, both these companies still owed DSIL several crores of
outstanding dues. Instead of paying off these dues, DHL purportedly
bought 49.98% shareholding of DSIL in VTL and the 50.02%
shareholding from the three benami entities. DHL further gave VTL
Rs.20 crores to subscribe to warrants issued by DSIL, while DHL
itself was under a Scheme of Rehabilitation sanctioned by the BIFR.
On its part, VTL, while still owing money to DSIL, instead of
repaying those dues, subscribed to 6.9 lakh warrants allotted by DSIL,
which formed part of the promoter holding of DSIL. According to the
Plaintiff, the above facts demonstrated that the Defendants had
siphoned off the funds of DSIL to the detriment of the shareholders of
DSIL by borrowings from banks and using them to fund DHL. These
acts were detrimental to the interests of the shareholders of DSIL. It
is further pointed out that since DHL was a sick company it could not
have possibly raised funds on its own.
14. It is stated that that none of the above facts have been reflected in
the Annual Report of DSIL. The plaint acknowledges that there is
pending litigation before the CLB, this Court and the Securities
Appellate Tribunal („SAT‟) in which the DSIL had been bearing the
cost of litigation initiated/defended by it. However, the promoters of
DSIL have been benefited by the fraud and it is solely at their behest
and for their benefit that the litigation was being carried out in the
name of DSIL. According to the Plaintiff, the Auditors (Defendant
No.14) of DSIL had also committed a breach of the provisions of the
Act by failing to report the above position in their Report. The
Plaintiff alleges that there is a breach of fiduciary duty cast on the
Board of Directors and the individual directors have been arrayed as
Defendant Nos. 2 to 11. In para 14 of the plaint, numerous
irregularities in the Annual Report and the Accounts have been set
out. According to the Plaintiff, the Defendants had violated Sections
209 to 211, 215, 217, 219 and 227 of the Companies Act, 1956 and
"several provisions of the Listing Agreement with the Bombay Stock
Exchange including but not limited to Clause 32, Clause 41, and
Clause 49."
15. In para 19 of the plaint, it is stated as under:
"19. The Plaintiffs are agitating issues with regard to
mismanagement and oppression of the minority before the
Hon‟ble Company Law Board, and on issues with regard to the
violation of the SEBI Act and Regulations before the Hon‟ble
Securities Appellate Tribunal. The reliefs claimed in this suit
have not been claimed elsewhere and are solely within the
jurisdiction of this Hon‟ble Court."
16. On the basis of the above pleadings the following reliefs are
sought in the suit:
"(a) Pass a decree in favour of the Plaintiff and
against the Defendants, declaring the Annual
Report of the Defendant No.1 along with the
Accounts, the Directors Report, the Auditors
Report and annexures thereto, for the year ending
31.03.2008 as currently circulated to the
shareholders after approval by the Defendants on
25th June 2008, as null and non est and the same be
treated as cancelled.
(b) Pass a decree of mandatory injunction directing
appointment of an independent and qualified
Chartered Accountant to carry out a fresh audit of
the books of account of the Defendant No.1
company and the Defendants to provide the
shareholders with the true and fair state of affairs
by circulating for the shareholders approval in a
duly constituted shareholders meeting, a fresh
Annual Report and Accounts prepared in
accordance with the provisions of law;
(c) pass a decree of permanent injunction in favour
of the Plaintiff, restraining the Defendants, their
respective officers, agents, etc from passing
proposed Resolution No.1 (to adopt the Directors
Report, the Audited Balance Sheet and the Profit
& Loss), Resolution No. 3 (Re-appointment of Mr.
Madhav Shriram as a Director), and Resolution
No. 6 (to reappoint M/s. A.P. Ferguson & Co. as
the auditors of the Company), as stated in the
Notice for the AGM dated 25th June 2008, in the
Annual General Meeting proposed to be held on
25th September 2008;
(d) Pass a decree of permanent injunction in
favour of the Plaintiff, restraining the Defendants
their respective officers, agents, etc. from acting
upon or giving effect to the Annual Report and
Audited Accounts as approved by the Defendants
on 25th June 2008 for the year ending 31st March
2008, and upon the proposed Resolutions No. 1, 3
and 6; and
(e) grant costs in favour of the Plaintiff and against
the Defendants."
17. Along with the suit, the Plaintiff also filed IA No. 11686 of 2008
under Order XXXIX Rules 1 and 2 read with Section 151 of CPC in
which prayer was made for an ad interim injunction to restrain the
defendants from proposing or passing the resolution adopting or from
giving effect to the Annual Report and Audited Accounts for the year
ending 31st March 2008 at the Annual General Meeting (AGM)
proposed to be held on 25th September 2008 and for a direction for a
fresh audit of the books of account of DSIL to be carried out by an
independent and qualified Chartered Accountant.
18. On 23rd September 2008, this Court directed summons to issue in
the suit and notice in the aforementioned application. However, no
interim injunction was granted since it was felt that if the resolution in
question were stayed, irreparable injury could be caused to DSIL. The
court took note of the contention of learned Senior counsel for
Defendant No.1 who appeared on caveat and pointed out that similar
points were urged by the Plaintiff before the CLB and before
SEBI/SAT but without success.
19. After the AGM was held on 25th September 2008 and the
resolution in question passed, the Plaintiff filed IA No. 12823 of 2008
under Order VI Rule 17 CPC for amending the plaint to challenge the
said decision. Meanwhile, the Defendant DSIL had filed IA No.
12820 of 2008 under Order VII Rule 11 CPC. Application IA No.
12822 of 2008 was filed by Defendant No.1 DSIL for suspending the
time for filing the written statement. Along with the plaint, the
Plaintiff also filed IA No. 11687 of 2008 under Order II Rule 2 CPC
seeking leave to sue for in respect of any other cause of action that
may arise after the assessment and investigation of the damage caused
to DSIL and in the event of any misappropriation being discovered
subsequently.
20. Defendant No.11 did not appear despite service. No written
statement was filed in the suit by the other defendants. Pleadings were
complete in IA No. 12820 of 2008 under Order VII Rule 11 CPC,
which, with the consent of parties, was heard finally.
The case of the Defendant
21. The contentions of DSIL in the said application under Order VII
Rule 11 CPC are as follows:
(a) The allegations in the suit were really in the nature of
oppression and mismanagement for which a remedy was
provided under the Act. Alternatively, the alleged violations
were of the provisions of Securities & Exchange Board of India
Act, 1992 („SEBI Act‟) and the Regulations framed thereunder.
Therefore alternate/efficacious remedies were available to the
Plaintiff either before the CLB or before the SEBI and the
Securities Appellate Tribunal (SAT). It is submitted that the
jurisdiction of the civil court is barred in view of Section 9 CPC
read with Section 41 (h) of the Specific Relief Act 1963 („SRA‟)
and Section 15 Y of the SEBI Act.
(b) The very grievance raised in the present suit is already the
subject matter of proceedings before the CLB, SEBI and SAT.
Therefore, the present suit was case of forum shopping
particularly since no interim relief was granted to the Plaintiff by
the CLB and SEBI. The suit is also therefore an abuse of the
process of the court.
(c) The suit was a personal action brought about by a single
shareholder against the manner of preparation of company‟s
accounts. In any event none of the other shareholders had made
complaint about the alleged lack of proper
notice/particulars/disclosures in the Annual Accounts and
Auditors Report. The decision of the majority of the
shareholders had to prevail.
(d) The present suit insofar as seeks the removal of Defendant
No.14 as an Auditor is barred since there is specific procedure
outlined in Section 225 of the Act for removal or appointment of
an Auditor. That cannot be short circuited by resorting to a civil
suit.
(e) At the AGM held on 25th September 2008 the Plaintiff was
represented by Mr. Anil K. Mittal who demanded poll on several
items on the agenda. Poll was accordingly taken on the
following day i.e. 26th September 2008. The result thereof was
announced by the Chairman based on the scrutinizer‟s report.
All the seven agenda items were passed with more than the
requisite votes. Since the Plaintiff had participated in the said
meeting it should be deemed to have abandoned the present
proceedings and therefore the cause of action leading to the
filing of the present suit did not survive any more.
(f) Towards implementation of the said resolutions, copy of
balance sheet, profit and loss account and related documents
were filed with ROC at New Delhi and they were taken on
record by the said office. The Annual Report has also been
uploaded on SEBI‟s web-site on 29th September 2008 in terms
of the Listing Agreement. Reappointments/ appointments of the
Directors have also been given effect to by filing the statutory
Form 32 with the ROC. Minutes of meeting have been also sent
to the BSE on 3rd October 2008. It is submitted that in view of
the above developments the cause of action had disappeared.
Accordingly it is prayed that the plaint must be rejected.
The Plaintiff's reply
22. In its reply to the IA under Order VII Rule 11 CPC, the Plaintiff
submitted that in view of the subsequent developments, the application
had become infructuous. It is further submitted that the ground on
which the DSIL seeks rejection of the plaint is not one of the grounds
enumerated under Order VII Rule 11 CPC. It is submitted that the
reference to Section 41 (h) SRA is misplaced. It is further submitted
that the challenge to the audited accounts adopted by the DSIL for the
financial year ending 2007-2008 is not the subject matter of any other
petition before the CLB or SEBI/SAT and, therefore, the present civil
suit is maintainable. Merely on account of the commonality of the
background facts leading up to the present suit, it could not be
concluded that the issues involved in the suit were common to the
proceedings before the CLB or the SAT. The issues in this suit are
distinct and separate. It is urged that violations complained of and the
reliefs claimed in the suit have not been urged or claimed by the
Plaintiff before any other forum. It is stated that there is no provision
of law pointed out by DSIL according to which a single individual
shareholder cannot maintain a suit against a company. The mere
approval of the annual accounts at the AGM of DSIL cannot render the
suit infructuous since a shareholder cannot possibly give consent to an
act that is in violation of the law.
Submissions of Counsel
23. Mr. Anant Haksar, Senior counsel appearing for the Plaintiff/non-
applicant in IA No. 12820 of 2008 submits that the question to be
addressed first was whether in terms of Section 9 CPC there was an
express or an implied bar to this court entertaining the suit? Secondly,
whether Section 41 (h), SRA constituted a bar to the maintainability of
the suit? Thirdly, whether a suit seeking the relief of a bare declaration
without a consequential relief of injunction can be maintainable?
24. It is submitted by Mr. Haksar that Section 41 (h) SRA is only a bar
to the court granting an injunction in a given context. It does not bar
the maintainability of the suit itself. In any event, the relief concerning
the removal of the auditor has not been claimed by the Plaintiff before
CLB or the SAT and, therefore, not hit by Section 41 (h) SRA. Further,
notwithstanding Section 34 SRA, the common law remedy is not taken
away. It is submitted that none of the grounds on which the Defendants
seek rejection of the plaint are spelt out in Order VII Rule 11 CPC. It is
submitted that this is not a case where there is no disclosure of cause of
action, or where the plaint contains a statement whereby the suit
appears to be barred by any law. As regards the proceedings before the
SAT, it is submitted that the reliefs sought before that authority are
different from those sought in the petition before the CLB and in the
present suit. The proceedings before the SAT primarily concern the
violation of the SEBI Takeover Code. It is therefore submitted that
Section 15 Y SEBI Act does not bar the present suit. Reference has
been made to a large number of decisions including CDS Financial
Services (Mauritius) Limited v. BPL Communications Limited [2004]
121 CC 374 (Bom), Jaypee Cement Ltd., in re. [2004] 62 CLA 329
(All.), Spices Valley Estate Limited v. TC For Express Limited (2007)
3 Comp LJ 148 (Mad), Pradip Kumar Sarkar v. Luxmi Tea Co.
Limited (1990) Vol. 67 491 (Cal), Dr. T.M. Paul v. City Hospital
(Pvt.) Limited [1999] 97 CC 216, Shonkh Technologies Limited v.
Union of India (2008) 85 CLA 351 (Del), Smt. Premvati v. Smt.
Bhagwati Devi (2008) 145 Comp Cas 440 (Delhi), Popat & Kotecha
Property v. State Bank of India Staff Association (2005) 7 SCC 510,
Wasudhir Foundation v. C.Lal & Sons 45 (1991) DLT 556, M/s.
Suraj Bhan Anil Kumar v. M/s. Molu Ram Kapoor Chand 82 (1999)
DLT 277, Gaganmal Ramchand v. The Hongkong & Shanghai
Banking Corporation AIR 37 (1950) Bombay 345, Hari Bhagwan
Sharma v. Badri Bhagat Jhandewalan Temple Society 27 (1985)
DLT 68, Transcore v. Union of India (2008) 1 SCC 125, Kasthuri,
Sukanyalakshmi, Subathradevi, Saroja v. Baskaran and K.Selvaraj
(2004) 1 MLJ 175 and Ramaswamy Palledar v. Secretary to the
Government of NCT of Delhi 2000 VII AD (Delhi) 128.
25. Mr. T.K. Ganju, learned Senior counsel refers to Sections 397, 398
and 402 of the Act and contends that powers of the CLB are wide
enough to grant any of the reliefs sought for in the suit. According to
him, once the Plaintiff has elected to go before the CLB with a petition
complaining of oppression and mismanagement, it cannot be permitted
to go from one forum to another with the same set of grievances till
such time it gets relief. That would clearly constitute forum shopping
which is impermissible in law. He hands over a chart showing the
comparison of the averments made in the suit, in the petition before the
CLB and in the petition before the SEBI/SAT and points out to the
commonalities of the averments.
26. It is further pointed out that after the filing of suit, the Plaintiff has
sought to amend its petition before the CLB. Although not termed
formally as an amendment application, it is described as an application
"for placing on record additional and subsequent facts, documents and
ground along with supporting affidavit." Referring to Section 41 (h)
SRA, it is submitted that inasmuch as the Court cannot possibly grant
the relief of injunction, the suit would be only for a bare declaration
which is barred under Section 34 SRA. It is pointed out that even in the
amendment application under Order VI Rule 17 CPC, the reliefs for a
consequential injunction have not been sought to be deleted. By an oral
statement at the bar, the Plaintiff cannot seek to restrict the relief being
sought for in the suit. It is submitted that suit is also bad for misjoinder
of parties.
27. It is submitted that the test is really whether the relief being sought
in the suit is expressly or impliedly barred by law. There is a clear bar
in terms of the Act to "entertaining" the suit for the same relief as is
sought before the CLB. It is submitted that after the enactment of the
Act and, in particular, Sections 397, 398 and 402 thereof the relief
against oppression and mismanagement can no longer be termed as a
common law right. It is contended that there is an express bar to
claiming the relief of removal of the auditor without following the
procedure under Section 225 of the Act.
28. Mr. Ganju, learned Senior counsel refers to the various decisions
including Anil Gupta v. J.K. Gupta 2002 (110) CC 610 (P&H), Kamal
Kumar Dutta v. Ruby General Hospital Limited (2006) 7 SCC 613,
Khetan Industries Pvt. Limited v. Manju Ravindraprasad Khetan
AIR 1995 Bombay 43, Bennet Coleman and Co. v. Union of India
1997 (47) CC 92, M/s. Ammonia Supplies Corporation (P) Limited v.
M/s. Modern Plastic Containers Pvt. Limited AIR 1998 SC 3153,
Hindustan Lever Employees' Union v. Hindustan Lever Limited AIR
1995 SC 470, Manohar Lal Chatrath v. Municipal Corporation of
Delhi 77 (1999) DLT 5, Reckit Benckiser (India) Limited v. Naga
Limited 104 (2003) DLT 490, Priyanka Vivek Batra v. Neeru Malik
154 (2008) DLT 354, Reckitt Banckiser (India) Limted v. Hindustan
Lever Limited 151 (2008) DLT 650, Amar Nath Malhotra v. MCS
Limited (1993) 76 CC 469, Vijay M. Shah v. Flex Industries 2001
(103) CC 1063, Hind Samachar Limited v. Indian Newspaper Society
119 (2005) DLT 570, Eternit Everest Limited v. Neelmani Bhartiya
AIR 1999 Rajasthan 235, Raja Ram Kumar Bhargava (dead) by LRs
v. Union of India AIR 1988 SC 752, Punjab State Electricity Board v.
Ashwani Kumar JT 1997 (5) SC 182, Transcore v. Union of India
(2008) 1 SCC 125, Life Insurance Corporation of India v. Escorts
Ltd. (1986) 1 SCC 264.
Implied or express bar under Section 9, CPC
29. One of the questions to be considered is whether there is any
implied or express bar to the maintainability of the suit. Section 9 of
the Code of Civil Procedure, 1908 states that the civil court shall have
jurisdiction to try all suits of a civil nature "excepting suits of which
their cognizance is either expressly or impliedly barred."
30. For the purpose of examining the above question, the court is
accepting as correct the averments in the plaint as originally filed. For
the sake of completeness, although the application for amendment has
not yet been allowed, this court has also kept in purview the plaint as
sought to be amended. According to the Plaintiff, the annual accounts
and the Annual Report of DSIL for the year 2007-08 suffers from
numerous irregularities. A declaration to that effect is being sought in
the suit. Consequently, the relief of injuncting DSIL from adopting the
Annual Report and annual accounts has been sought. The amendment
sought to be carried out to the plaint is a result of the adoption of
certain resolutions at the AGM of the DSIL which took place on 26 th
September 2008. The amendments, if allowed, would add to the
prayers in the suit to seek a declaration that the resolutions passed at
the AGM/Poll held on 25th September 2008/26th September 2008
would be null, void and non est. The amendment does not seek to
delete the mandatory injunction originally sought directing the
appointment of an independent Chartered Accountant to carry out a
fresh audit of the books of account of DSIL. Further the prayer of
removal of the auditor (Defendant No.14) as auditor of DSIL and
directing the appointment of another auditor in place thereof also
remains. In effect, the suit even after the proposed amendments
continues to be one seeking the relief of declaration and consequential
injunction.
31. The question is whether the suit framed as such is impliedly
barred? According to the Defendants, the Plaintiff has already elected
to go before two other fora - the CLB and the SAT. Pending before the
CLB is a petition filed by the Plaintiff complaining of oppression and
mismanagement within the meaning of the Act. The provisions of that
Act and in particular Sections 397 and 398 have been held to be a
complete code. The question whether the issues arising out of the
management of the affairs of a company can be adjudicated in a civil
suit and whether such suit is impliedly barred in view of the remedy
available under the Act, has come up before the courts earlier.
32. In Bennet Coleman & Co. v. Union of India (supra) the Division
Bench of the Bombay High Court explained the scope and ambit of
Chapter VI of the Act which includes Sections 397, 398 and 402 of the
Act. In drawing a distinction between the powers of the Central
Government under Chapter IV A of the Act and powers of the Court
under Chapter VI (later these powers of the Court were vested in the
CLB), the Bombay High Court held as under:
"... It is in view of this scheme which is very
apparent on a fair reading of the arrangement of
chapters and the Sections contained in each chapter
which are all grouped under Part VI of the Act that
the question will have to be answered as to whether
the powers of the court under Chapter VI (which
includes Sections 397, 398 and 402) should be read
as subject to the provisions contained in the other
chapters which deal with normal corporate
management of a company and, in our view, in the
context of this scheme having regard to the object
that is sought to be achieved by Sections 397 and
398 read with Section 402, the powers of the court
thereunder cannot be so read. Further, an analysis
of the Sections contained in Chapter VI of Part VI
of the Act will also indicate that the powers of the
court under Section 397 or 398 read with Section
402 cannot be read as being subject to the other
provisions contained in Sections dealing with usual
corporate management of a company in normal
circumstances. As stated earlier, Chapter VI deals
with the prevention of oppression and
mismanagement and the provisions therein have
been divided under two heads --under head A
powers have been conferred upon the court to deal
with cases of oppression and mismanagement in a
company falling under sections 397 and 398 of the
Act while under head B similar powers have been
given to the Central Government to deal with cases
of oppression and mismanagement in a company
but it will be clear that some limitations have been
placed on the Government's powers while there are
no limitations or restrictions on the court's powers
to pass orders that may be required for bringing to
an end the oppression or mismanagement
complained of and to prevent further oppression or
mismanagement in future or to see that the affairs
of the company are not being conducted in a
manner prejudicial to public interest. In other
words, whenever the legislature wanted to do so it
has made a distinction between powers conferred
on the Government (vide Section 408) and powers
conferred on the court (vide Section 402} while
dealing with similar emergent situations or
extraordinary circumstances arising in the
management of a company and in the case of the
Government it has placed restrictions or limitations
on the Government's powers but no restrictions or
limitations of anything have been prescribed on the
court's powers."
33. Emphasizing that the powers of the Court were wide, given the
object that is sought to be achieved by the exercise of such power
under Sections 397 and 398, it was explained that clauses (a) to (g) of
Section 402 "indicate the widest amplitude of the court‟s power". It
was then explained as under:
"An examination of the aforesaid Sections clearly
brings out two aspects, first, the very wide nature of
the power conferred on the court, and, secondly, the
object that is sought to be achieved by the exercise
of such power with the result that the only
limitation that could be impliedly read on the
exercise of the power would be that nexus must
exist between the order that may be passed there
under and the object sought to be achieved by these
Sections and beyond this limitation which arises by
necessary implication it is difficult to read any other
restriction or limitation on the exercise of the
court's power. We are, therefore, unable to accept
Mr. Sen's contention that the court's powers under
Section 398 read with Section 402 should be read
as subject to the other provisions of the Act dealing
with normal corporate management or that the
court's orders and directions issued thereunder must
be in consonance with the other provisions of the
Act."
34. It is plain from the above decision on the facts of the present case
that it would be definitely open to the Plaintiff to invite the CLB to
examine the issues raised in the suit i.e. whether the DSIL can be said
to be mismanaged on account of the audited accounts and Annual
Report not reflecting the correct state of affairs. In fact, by the
subsequent application filed before the CLB, the Plaintiff has sought to
bring on record the very averments and contentions raised in the
present suit. This Court is unable to find any restriction on the power
of the CLB to examine these issues.
35. In Khetan Industries Pvt. Limited v. Manju Ravindraprasad
(supra) the learned Single Judge of the Bombay High Court followed
the decision of the Supreme Court in Dhulabhai v. State of Madhya
Pradesh AIR 1969 SC 78 to hold that the question whether a group of
shareholders could seek the removal of a director by filing a civil suit
should be answered in the negative. It was held that the civil court
cannot interfere in such matters. They should be dealt with in
accordance with the procedure laid down in the Act. It was observed
that the rule in Foss v. Harbottle (1843) 2 Hare 461 applied in such a
case. It did not fall in any of the known exceptions to the rule viz., , an
act which is ultra vires the company or illegal, an act which constitutes
a fraud against the company and a resolution which requires a qualified
majority but has been passed by a simple majority. It was held that the
civil court‟s jurisdiction was impliedly barred.
36. The wide nature of the powers under the Act has been explained
recently by the Supreme Court in Kamal Kumar Dutta v. Ruby
General Hospital Limited (supra). It was observed in the context of
Sections 397 and 398 that "the Act is a complete code". Likewise, the
learned Single Judge of the Punjab & Haryana High Court in Anil
Gupta v. J.K. Gupta (supra) held that the jurisdiction of the civil court
was impliedly barred in relation to the question of oppression or
mismanagement. The aggrieved persons could certainly approach the
CLB. Notice was taken of the judgment of the Supreme Court in
Ammonia Supplies Corporation (P) Limited v. Modern Plastic
Containers Pvt. Limited AIR 1998 SC 3153.
37. In Ammonia Supplies Corporation (P) Limited (supra) the
Supreme Court was considering the question whether an application
for rectification of the register of members in terms of Section 155 of
the Act and disputes arising thereunder can be agitated before the civil
court. It was held that in the first place the civil court was required to
examine on the facts of each case whether the application made was
for rectification or „something else‟. It was held that it was necessary
to remove the cloak and examine what the dispute actually was about.
It was further explained as under:
"26. ............. In case any claim is based on some
seriously disputed civil rights or title, denial of
any transaction or any other basic facts which may
be the foundation to claim a right to be a member
and if the Court feels such claim does not constitute
to be a rectification but instead seeking
adjudication of basic pillar some such facts falling
outside the rectification, its discretion to send a
party to seek his relief before civil court first for the
adjudication of such facts, it cannot be said such
right of the court to have been taken away merely
on account of the deletion of the aforesaid
proviso. Otherwise under the garb of rectification
one may lay claim of many such contentious issues
for adjudication not falling under it. Thus in other
words, the court under it has discretion to find
whether the dispute raised are really for
rectification or is of such a nature, unless decided
first it would not came within the purview of
rectification."
38. Thereafter it was explained in para 31 as under:
"31..............So, whenever a question is raised
court has to adjudicate on the facts and
circumstance of each case. If it truly is
rectification all matter raised in that connection
should be decided by the court under Sec. 155
and if it finds adjudication of any matter not
falling under it, it may direct a party to get his
right adjudicated by civil court. Unless
jurisdiction is expressly or implicitly barred
under a statute, for violation or redress of any
such right civil court would have jurisdiction.
There is nothing under the Companies Act
expressly barring the jurisdiction of the civil
court, but the jurisdiction of the 'court' as defined
under the Act exercising its powers under various
sections where it has been invested with
exclusive jurisdiction, the jurisdiction of the
civil court is impliedly barred."
39. The law, as explained by the Supreme Court in Ammonia Supplies
Corporation (P) Limited (supra), is held and has been followed in
Vijay M. Shah v. Flex Industries 2001 CC Vol. 103 1063, Reckit
Benckiser (India) Limited v. Naga Limited 104 (2003) DLT 490,
Hind Samachar Limited v. Indian Newspaper Society 119 (2005)
DLT 570 and Amar Nath Malhotra v. MCS Limited 1993 Vol 76 CC
469). In Vijay M. Shah v. Flex Industries (supra), it was pointed out
that after the 1988 Amendment to the Act, the jurisdiction of the Court
to decide and determine matters pertaining to Sections 397 and 398
vested with the CLB and further the allegations concerning the matters
covered by those provisions should be agitated only by the CLB.
40. Applying the ratio of Ammonia Supplies Corporation (P) Limited
(supra) to the instant case, it requires to be noticed that the claim made
in the suit does not contain any aspect which cannot be adjudicated by
the CLB. Under Section 402 (g) of the Act, the power of the CLB
would include the passing of an order which may provide for "any
other matter for which in the opinion of the Tribunal it is just and
equitable that provision should be made." Under Section 398 (1) of the
Act, the scope of the power of the CLB is to determine whether "the
affairs of the company are being conducted in a manner prejudicial to
public interest or in a manner prejudicial to the interests of the
company". Likewise under Section 397, it is called upon to adjudicate
on whether the affairs are being conducted "in a manner oppressive to
any member or members". Further, both under Sections 397(2) and
398 (2) of the Act, the CLB may "with a view to bringing to an end the
matters complained of, make such order as it thinks fit." The inevitable
conclusion is that the jurisdiction of the civil court is impliedly barred.
41. If there was any doubt whether the issues sought to be raised in the
civil suit can be agitated before the CLB, that stands removed by the
conduct of the Plaintiff itself in filing a further application before the
CLB "for placing on record additional and subsequent facts,
documents and ground along with supporting affidavit." A perusal of
the application filed on 28th February 2008 would show that the very
averments made in the plaint, i.e out about the investments in DSIL
and in DHL and other facts set out in the plaint have been included in
the application before the CLB. It is not, therefore, possible to accept
the plea of the learned Senior counsel for the Plaintiff that what
constitute the subject matter of the suit is different and distinct from
what is being presently agitated before the CLB.
42. The learned Senior Counsel for the Plaintiff, however, placed
reliance upon certain other judgments which seemingly hold a contrary
point of view. In Pradeep Kumar Sarkar v. Laxmi T. & Co., the
question that arose was whether there was any impediment in the
exercise of the powers by the Court to supersede the Board of
Directors of the company although it had the support of the majority if
it was found that the Board of Directors had acted malafide or in a
manner oppressive to the shareholders or in a manner prejudicial to the
interests of the company or to public interest. It was held that the court
always had jurisdiction to prevent abuse of the majority power. The
Court found that the management had refused to register the transfer of
shares to ensure that no change took place in the composition of the
Board of Directors. Accordingly, the Board of Directors was required
to be superseded and restrained from functioning any further. It was
held that there was no impediment of the Act in the exercise of power
by the Court to supersede the Board of Directors of a Company,
although it has the support of the majority. What requires to be noticed
is that this was a petition before the High Court under Sections 397 and
398 of the Act at a time when the 1988 Amendment had not come into
effect and the powers thereunder had not been transferred to the CLB.
The facts are also not similar. There the Plaintiff had not earlier
approached a different forum before filing the suit. In the considered
view of this Court, the above decision does not help the Plaintiff.
43. The facts leading to the decision of the Kerala High Court in Dr.
T.M. Paul v. City Hospital (Pvt.) Limited (supra) were that the
minority shareholders complained that the majority was attempting to
place a heavy financial burden on the company by the purchase of
equipment and also lease of the hospital which were against the
interests of the company and could not have been approved by the
majority. It was held that the principle in Foss v. Harbottle (1843) 2
Hare 461 could not be a bar to granting the reliefs sought for in the
suit. Negativing the argument that there was a remedy available before
the CLB under Sections 397 and 398 of the Act, it was held that the
scope of an application under those Sections was limited. It was further
held: "It is intended to prevent only continuing wrongs and does not
enable the shareholders to challenge concluded transactions. Moreover,
the provisions are essential intended against the tyranny of the majority
against the minority shareholders." With respect, this Court is unable
to accept the conclusion arrived at by the Kerala High Court, although
reliance was placed upon the judgment in Avanthi Exlosives P.
Limited v. Principal Subordinate Judge Tirupathi [1987] 62 Comp
Cas 301 (AP). It must be recalled that these decisions were given at a
time when the judgment of the Supreme Court in M/s. Ammonia
Supplies Corporation (P) Limited (supra) was not available. There is
no reference, therefore, to the said decision in the judgment of the
Kerala High Court.
44. Reliance was placed on the judgment of the Madras High Court in
Spices Valley Estate Limited v. TC Forexpress Limited (supra). Here
again, on facts it was held that when the allegations related to
misrepresentation, fraud, failure to furnish details, dishonest or mala
fide intention, the jurisdiction of the civil court was not barred. What
distinguishes the present case from the aforementioned case is that the
Plaintiff there had not opted to go before the CLB before approaching
the civil court. Here the Plaintiff first approached the CLB and failed
to obtain any interim relief. It cannot be permitted to approach the civil
court seeking the same relief as that would encourage forum shopping
and constitute an abuse of the process of law.
45. In In re. Jaypee Cement Limited, the learned Single Judge of the
Allahabad High Court was called upon to approve a scheme of
amalgamation between two companies under Sections 391 and 394 of
the Act. Again this decision cannot help the Plaintiff. In the first
instance the said petition did not deal with the situation where
shareholders had already approached the CLB in a petition under
Sections 397 and 398 of the Act and subsequently when interim relief
was refused by the CLB, they approached the civil court. Consequently
that case was really about the powers of the Court to approve a scheme
of amalgamation. The 1998 Amendment does not bring about any
change to that situation.
46.1 Extensive arguments were addressed by Mr. Haksar on the basis
of the decision of the Division Bench of the Bombay High Court in
CDS Financial Services (Mauritius) Limited v. BPL
Communications Limited (supra). The Plaintiff there filed a suit
seeking a declaration that an agreement dated 27th June 2001 among
four groups of shareholders agreeing that the cellular business of
Defendant No.1 conducted through its subsidiaries would ultimately be
merged with the cellular business of the operating subsidiaries of Birla-
Tata-AT&T („BTAL‟) was without the approval and sanction of the
shareholders of the company under Section 293(1)(A) of the Act and
therefore was null and void. An injunction was prayed for restraining
the Defendant from giving effect to the said agreement as well as to the
resolution of the Board of Directors of 25th July 2001.
46.2 The Plaintiff challenged the impugned action on three grounds
namely; (a) that the conduct of the Defendant was actuated by mala
fides; (b) the transaction required the consent of the shareholders under
Section 293 (1)(A) of the Act; and (c) if the transaction were
completed without the approval of the company in a general meeting, it
would be ultra vires the company. A preliminary objection was raised
by the Defendant that the arguments based on mala fides were really in
substance an allegation of oppression and mis-management by the
majority shareholders coming under the purview of Sections 397 and
398 of the Companies Act and that the "Plaintiff should have
approached the Company Law Board for appropriate reliefs."
46.3 The Division Bench of the Bombay High Court in CDS Financial
Services (Mauritius) Limited v. BPL Communications Limited took
note of the legal position arising from the earlier decisions of the
Supreme Court in Dhulabhai v. State of Madhya Pradesh and Raja
Ram Kumar Bhargava v. Union of India. It also took note of the later
decision in Ammonia Supplies Corporation Private Ltd. v. Modern
Plastic Containers Pvt. Ltd. as well as the judgment of this Court in
Vijay M. Shah v. Flex Industries Ltd. It was observed that "if the
right is traceable to general law of contract or it is a common law right,
it can be enforced through civil court, even though the forum under the
statute also will have jurisdiction to enforce that right." The Division
Bench appears to have relied upon a decision by another Division
Bench of that Court in Herbertson's case [2002] 109 Comp Cas 913
where the Hongkong & Shanghai Banking Corporation case was
considered and it was held that notwithstanding the fact that the
Plaintiffs in that case could approach the Company Law Board under
Section 111A of the Act, the Plaintiff had a common law right to seek
rectification of registration of members and that "pre-existing common
law right can be taken away only by express enactment or necessary
implication." Accordingly the preliminary objection was overruled.
46.4 To this Court, it appears that the facts of the present case are
different inasmuch as the Plaintiff here has already approached two
other fora namely the CLB with a petition under Section 397 and 398
as well as the SEBI and SAT. This is, therefore, not a case where the
Plaintiff first sought remedy before a civil court. Here the doctrine of
election would apply. If the Plaintiff chooses to enforce its right first
before the CLB, can it then be permitted to also approach the civil
court particularly when CLB refuses interim relief? Such a question
was never considered in CDS Financial Services (Mauritius) Limited.
This Court is therefore unable to accept the arguments of Mr. Haksar
that notwithstanding the availability of a remedy before the CLB, this
Court should entertain the present suit.
Conclusion:
47. Having carefully examined the plaint as well as the averments
made in the petition before the CLB, as further sought to be amended
by the subsequent application, it appears to this Court that the grounds
on which the relief is being sought for are more or less similar to what
has been sought in the CLB. In the considered view of this Court,
therefore, the answer to the question first posed is that there is an
implied bar to this Court entertaining the present suit.
48. Although the learned Senior counsel for the Plaintiff may be right
in his contention that the suit is itself not barred under Section 41 (h)
SRA, the fact remains that the suit is reduced to one seeking a bare
declaration if the consequential prayers for injunction are barred since
they have already been sought in other earlier proceedings before the
CLB and SAT. Such a suit for a bare declaration (which in any event is
not the form of prayer even after the proposed amendments) would be
barred expressly by Section 34 SRA.
49. For the above reasons, the application is allowed. The plaint is
rejected. Consequently, the suit is dismissed with costs. The other
pending applications are also dismissed.
S. MURALIDHAR, J.
AUGUST 25, 2009
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